The Story of Two People and Their Path to Financial Independence

You can see the Introduction and summary of what we are talking about here. You should also read the disclaimer:

***Disclaimer ***

This is written for educational purposes. I am writing to explain my understanding of these principles. Please, do your own research and talk to a licensed professional before putting this into practice. The intent of this article is to aid in understanding, point you in the right direction, and to allow you to ask a licensed professional questions that may pertain to your individual situation. If you see something wrong, please let me know with documentation, so that I can adjust and get all the information as correct as possible.

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Here we are again… setting up a 401k. But this time it’s not a solo 401k. That was nice and easy, and no, we didn’t use Vanguard. We’re now adding employees to the mix, so we can no longer use a solo 401k. We’re going to have to put on our big boy pants, and here’s how:

Step 1: Price Quotes

Where do we start? Well, I started by giving everyone’s favorite brokerage house a call to see what it takes to set up a 401k:

Vanguard – Vanguard offers an all inclusive package that takes care of holding the money, managing the documentation and testing and advisement services. They have two tiers to their cost structure. For up to 15 employees, the have a full service plan that is $3,475 a year, plus a one time initiation fee of $1,000. They also provide a lesser package that doesn’t include certain advisers, etc for $2,500 plus $500 initiation. You have full access to all of Vanguard’s funds in this plan.

Hmm… sounds pricey, what else is out there?

Fidelity – We used Fidelity for the solo 401k that we had before we had to change to big boy pants. So I called them. For a plan our size (2-5 employees) they offer nothing internally. So you have to go with a 3rd party to manage all the documentation and administration. So, basically they just hold the money and let someone else handle the rest. But there is a $1,500 set up fee for the account.

Schwab – Like Fidelity, they don’t handle plans this small, so a 3rd party admin is necessary to manage all the documentation and the compliance testing. While I was on the phone with them, they were nice enough to send over some 3rd party admin services they recommend (take note Fidelity). They mentioned that there is no initiation fee, but they do charge a $400 fee to access their trading platform.

They all offer their full assortment of low cost index funds, so that part isn’t even a consideration for us. You can find other providers that allow you to invest in real estate, peer to peer, and some other more fancy investment vehicles. We aren’t super interested in that, but it’s available if you want to invest your time and research it. Google: self-directed 401k.

After talking to some of the admins that Schwab sent over, we went with them.

Step 2: 3rd Party Administrators

I called several of the 3rd party admins to just talk to them and see what the process is. Most of them, charge some sort of initiation fee, and then some sort of annual fee. Again, there are different tiers of service. You can even pay to have them send someone out to talk about the benefits of a 401k, and why you want to have one. LOL!

Most of these 3rd party admins offer a basic package where you manage all the documentation and filings, they are just the clearing house to keep track of everything. I don’t want to bother with the documentation, as I have better things to do with my time. So, I found a place that manages all the filings, is a clearing house, and manages all the compliance testing. They don’t have an initiation fee, and their annual fee is $1,750, all in, including the Schwab fee.

Step 3: Setting up the Plan Documentation

Here’s where it gets interesting. We had a conference call to discuss the various features that I want to have in the plan. Since we’re managing it, I wanted to have access to adding post tax money to the account. I also, wanted to make sure that we have access to roll things over while the plan is still active.

What did we do? (we’ll get into more detail about this in the next episode)

We set up our plan so that our employees were eligible 90 days after the start date.

Since our current employees are not eligible for the plan during the current year, we’re cramming as much as we possibly can into the plan after-tax to take advantage of the mega-backdoor roth.

We made it so the company contributes 10% of the salary, regardless of employee contributions.

We allowed in-service rollovers, after-tax contribution, hardship loans, etc. All because we could put what ever we wanted into the by-laws of the plan, so I added all the bells and whistles.

Because I had done my research, and I knew what questions to ask. The 20 minute call turned into an hour and half of working out the details on how we could accomplish all that I wanted to happen.

At the end, he asked if I wanted a conference call to explain the benefits of a 401k to our employees. I got a good chuckle out of this. I mentioned I probably didn’t need that seeing as how I’m setting up a corporate 401k because we’re hiring a grand total of 1 additional person and just spent 90 minutes discussing super specific by-laws allowing for extremely complicated strategies. I think I have that part covered, but, uh, thanks.

Step 4: Setting up the Brokerage Accounts at Schwab

Luckily enough, the admin that we selected takes care of setting up the main accounts at Schwab. I’m just responsible to make sure that our employees don’t pick stupid funds. Easy enough.

I have to hand each new employee a form to fill out, then return that to our provider. They set up the accounts and each person can manage their own fund allocation, etc. through Schwab’s online interface.

I also have an admin account that has access to every account under our umbrella. That is so that I can make roll over distributions, etc.

Step 5: Submission of Payroll

Each month, when we run payroll for our company. (We run it monthly, otherwise we’d have to do the same thing for every run of payroll). We submit a CSV to our provider that has our wage information, along with individual contributions, company contributions and after-tax contributions.

This part is a little cumbersome with our provider at the moment. They are able to ACH (Automated Clearing House or auto-deduct in English) our individual contributions and our company match from our corporate checking account, but I have to cut a personal check for the after tax stuff. Schwab won’t let these come from a corporate checking account.

Our 401k admin keeps track of the money for documentation purposes and I run down to the local Schwab branch once a month and contribute to our after-tax bucket. From there, the admin moves the money from the holding account into the appropriate individual accounts.

Our provider has a simple online interface for use to upload a csv of our payroll information. Turns out it’s pretty easy and painless once you get the hang of it.

That’s really it

The set up was a bit of a pain, but after that it’s been running fairly smoothly. At this point we’ve been running it for about 6 months.

I did run into some issues with the after-tax contributions. They botched it up a bit, and over drew our corporate account once. But they reconciled it and paid the overdraft fee, so no harm no foul really. Live and learn.

Every time I talk to them, they remind me that I’m doing things that they don’t typically deal with. Well, now I have them trained if anyone is interested in using them, just ask. HA!

In our next and final episode, we’ll talk about how we actually executed the mega back-door roth using this newly established corporate 401k plan.

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12 Comments

A lot of this logistical stuff seems to have a “pain in the butt” factor to get it all set up, but after you get through the initial hurdle, you enjoy the benefits in perpetuity.My Sons Father recently posted…Is Your College Degree only Worth $1.07/hour?

You are most definitely correct. Once you have the heavy lifting of getting all the paperwork signed, and all the stuff set up and get into a rhythm from there it’s just maintenance. It’s also not being afraid to attempt to make some of this stuff happen. And just having the courage to step off the curb and go for it. That’s a lot of what life is all about.

I can just imagine these admins scratching their heads when talking to you since you’re forcing them to veer from their scripts. Do I sense your satisfaction about that? I would enjoy it myself.Mrs. Groovy recently posted…Building Groovy Ranch: Update 9

There is a certain amount of satisfaction that comes from it. But I really just wanted them to make it work. And They’ve done just that.

It really does help and it’s good to have folks on your side. We sort of worked together to make some of this stuff happen. So yeah, it’s been a collaborative effort. And yes, both sides have learned quite a bit from each other.

There is a certain amount of ground work. But once it’s gone, it’s not that bad.

They did over draw it, but again, they covered the fees and we ironed out the process so that shouldn’t happen again.

And yes, we actually executed the MegaBackDoor Roth. And yes, that was a super interesting experience, which we will get into. There’s actually a lot about that most people probably don’t know. I’m glad you’re looking forward to it.

Thank you for sharing! I used Vanguard Solo 401k plan for 4 years and getting ready for a big girl 401k plan. Should have done it last year and kept postponing hiring full-time for this reason. Who is your 3rd party admin?

We’re actually in the process of shifting admins. We’re going to be going with a place called Guideline. https://www.guideline.com/ They have everything out of the box and integrate directly with our payroll provider.

They actually use Vanguard as their broker as well. So, might be an easy transition for you. They don’t allow you to adjust the by laws as much as another provider would, but we’re not going to concern ourselves with that, as the benefit is marginal considering all the full integration stuff.